Rebuilding Trust in Tyco

Wharton's Mike Useem aims to overhaul the corporate culture. But was he too close to the problem?

In 1992, Michael Useem traveled to Tyco International Ltd. (TYC ) headquarters in Exeter, N.H., to interview L. Dennis Kozlowski for a book. The modest, two-story wooden building, the microscopic headquarters staff, even the stock ticker on the receptionist's desk all impressed the Wharton School professor as signs of a hyper-lean organization bent on increasing shareholder value. The tiny coffee room Kozlowski chose for the interviews seemed to speak volumes about his management style and philosophy, as did his tale about a search for a results-oriented division president. Useem was so impressed that he later would lavish praise on the company and its brash new CEO, describing him as a "superstar" and a "miracle maker." Useem also participated in a boot camp for neophyte CEOs organized by Kozlowski. He never foresaw the trouble that would follow. Says Useem: "I took character and integrity for granted."

A decade later, Kozlowski's sprawling empire has imploded. Useem, meanwhile, has been handed the task of helping Kozlowski's successor rebuild trust in the company and safeguarding against a repeat of one of the most spectacular governance failures in history. It's a job not everyone agrees he's cut out for. Says Barbara Ley Toffler, adjunct professor of management at Columbia University: "Major corporate figures like Kozlowski seem to attract pet academics who become cheerleaders for them. I think they become blind to the flaws. I suspect that's what Mike Useem did with Kozlowski." But Useem himself, along with some governance experts, says his failure to predict Kozlowski's downfall makes him eminently qualified. Who better to put governance safeguards in place than a man who knows firsthand how scoundrels can masquerade as saints?

Wise or not, in choosing Useem, 60, for its governance overhaul, Tyco has opted for one of the field's most unconventional thinkers. In his leadership classes at Wharton and his 1998 book The Leadership Moment, Useem draws inspiration from historical figures who have faced extreme challenges. His executive MBA students learn how leaders react under pressure by visiting scenes of triumph and disaster--including a deadly 1996 Everest summit attempt.

Unlike many of his contemporaries, Useem views governance as a function of leadership and corporate culture, not an exercise in the rote application of rules. He says many standard reforms that boards implement--gathering independent directors without management present, separating the roles of CEO and chairman, and ensuring board independence--have benefits that are at best ambiguous. He's more likely to craft an innovative approach to Tyco's problems that goes beyond the rules-based overhauls put in place at Walt Disney Co., Computer Associates International Inc., and other companies after their boards came under fire. "You won't see cosmetic change," says Arthur O. Sulzberger Jr., chairman and publisher of the New York Times Co., a Useem consulting client. "If there's a need for a culture shift, he's got all of the skills necessary to engage in that."

Tyco also chose someone who, to some extent, will be learning on the job. While Useem has advised many companies, this is the first time he's been asked to participate in a governance overhaul. The job couldn't be bigger. Tyco CEO Edward D. Breen hired Useem within 10 days of his own arrival. Just weeks later, Kozlowski and former CFO Mark Swartz were accused of looting the company of $170 million and reaping another $430 million from stock sales. An internal investigation would reveal that three directors had lucrative, undisclosed business ties to the company. Since then, all nine Kozlowski-era directors have indicated they would resign, although two will be chosen to stay as consultants. "Tyco really needs to go from worst to first," says Useem. "It really does have to transform itself."

Transformation is something Useem knows well. Growing up the son of college professors in East Lansing, Mich., Useem lived a middle-class life. In the 1960s, he became active in the antiwar movement at Harvard University, where a student deferment allowed him to avoid the draft. His outlook changed during that turbulent decade: Abandoning a promising future in physics, he chose to focus on more flesh-and-blood problems through a PhD in sociology, his parents' discipline. "At Cambridge, we thought the revolution was around the corner," says Joel Lamstein, a close friend. What followed was a distinguished academic career that included stints at Harvard and Massachusetts Institute of Technology before Useem moved to Wharton in 1990.

For years, he has taught courses that could be called a field guide to leadership--an approach critics say is "almost useless" for instructing students in the everyday demands of running a business. From their camps high in the Himalayas, his students analyze the management mistakes that led to the deaths of eight climbers on Everest. In Colorado, they hike the hillside where 14 firefighters lost their lives in a fast-moving 1994 blaze, examining leadership blunders that contributed to the disaster. And at Gettysburg, they visit Little Round Top, where a Union bayonet charge--led by Joshua L. Chamberlain, like Useem a professor in civilian life--proved crucial to the Civil War's outcome.

Useem says that students develop a visceral understanding of the problems leaders encounter. "He goes out of his way to make everything a learning experience," says Valerie Breuninger, a student who was on the 2002 Himalayas trek.

On governance matters, Useem is an iconoclast, having staked out positions that set him at odds with many peers. While Tyco will need to implement conventional reforms, Useem says they will not solve the company's biggest problem. Under Kozlowski, he says, Tyco's culture discouraged subordinates from questioning top executives and discouraged contact between directors and second-tier managers. To restore checks and balances, Useem advocates weaving ethics into the fabric of the company. He suggests focusing as much on integrity as business acumen when recruiting directors and making rigorous compliance with ethical standards a condition for promotion.

It's not enough, he says, to tell midlevel managers they have a duty to report superiors they suspect of fraud; Tyco needs an ombudsman for whom bringing problems to the board is a "sacred obligation." Says Useem: "You have to have in place devices to guard against the evil that lurks within."

Still, is Useem the best person to set up such a system? There's no way to tell yet how effective he will be, since Tyco is still mulling over his suggestions. But this is one battlefield where the professor is intimately familiar with the terrain--and has an incentive to ensure that this time the good guys come out on top.

By Louis Lavelle in New York

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